Washington University Consolidated Financial Statements June 30, 2014 and 2013

Transcription

1 Consolidated Financial Statements

2 Index Page(s) Independent Auditor s Report... 1 Consolidated Financial Statements Statements of Financial Position... 2 Statements of Activities Statements of Cash Flows... 5 Notes to Financial Statements

3 To the Board of Trustees of Washington University Independent Auditor s Report We have audited the accompanying consolidated financial statements of Washington University (the university ), which comprise the statements of financial position as of June 30, 2014 and June 30, 2013, and the related consolidated changes in its net assets and its cash flows for the years then ended. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Washington University at June 30, 2014 and June 30, 2013, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. September 23, 2014

4 Consolidated Statements of Financial Position (thousands of dollars) Assets Cash $ 116,365 $ 198,977 Investments 7,873,763 6,909,408 Accounts and notes receivable, net 409, ,797 Pledges receivable, net 215, ,523 Other assets 175, ,839 Fixed assets, net 2,009,225 1,901,786 Total assets $ 10,799,836 $ 9,807,330 Liabilities Accounts payable and accrued expenses $ 358,577 $ 294,644 Deposits, advances and other 41,442 40,307 Professional liability 80,819 78,963 Deferred revenue 93,201 91,070 Liabilities under split-interest agreements 42,903 43,931 Government supported student loans 45,559 45,394 Notes and bonds payable 1,358,940 1,352,538 Total liabilities 2,021,441 1,946,847 Net assets Unrestricted 4,208,587 3,793,089 Temporarily restricted 2,988,898 2,577,327 Permanently restricted 1,580,910 1,490,067 Total net assets 8,778,395 7,860,483 Total liabilities and net assets $ 10,799,836 $ 9,807,330 The accompanying notes are an integral part of these consolidated financial statements. 2

5 Consolidated Statements of Activities Year Ended June 30, 2014 Temporarily Permanently June 30, 2014 (thousands of dollars) Unrestricted Restricted Restricted T otal Rev enues Tuition and fees, gross $ 529,695 $ - $ - $ 529,695 Less: Scholarships (189,935) (189,935) Tuition and fees, net 339, ,7 60 Endowment spending distribution 242,7 69 4, ,509 Investment income 8, ,056 Gifts 89, , ,560 Grants and contracts revenues Direct costs recovered 348, ,57 0 Facilities and administrative costs recovered 126, ,044 Patient services 893, ,413 Auxiliary enterprises - sales and services 92, ,7 55 Educational activities - sales and services 129, ,807 Affiliated hospital revenues 99,292 99,292 Other revenue 30,322 30,322 Net assets released 82,920 (82,920) - Total revenues and other support 2,483,827 (11,7 39) - 2,47 2,088 Expenses Instruction 1,446,087 1,446,087 Research 447, ,065 Academic support 161, ,284 Student services 76,077 76,077 Institutional support 122, ,968 Auxiliary enterprises expenditures 101, ,880 Other deductions 27, ,07 3 Total expenses 2,382, ,382,434 Net operating results 101,393 (11,7 39) - 89,654 Non-operating revenues and (expenses) Investment returns net of endowment spending 321, ,128 5, ,148 Changes and reclassifications of split-interest agreements ,7 7 1 Permanently restricted gifts 83,696 83,696 Other (7,421 ) 2,317 1,7 47 (3,357 ) Non-operating, net 314, ,310 90, ,258 Change in net assets 415, , , ,912 Net assets Beginning of the year 3,793,089 2,577,327 1,490,067 7,860,483 End of the y ear $ 4,208,587 $ 2,988,898 $ 1,580,910 $ 8,778,395 The accompanying notes are an integral part of these consolidated financial statements. 3

6 Consolidated Statements of Activities Year Ended June 30, 2013 Temporarily Permanently June 30, 2013 (thousands of dollars) Unrestricted Restricted Restricted T otal Rev enues Tuition and fees, gross $ 502,113 $ - $ - $ 502,113 Less: Scholarships (177,214) (177,214) Tuition and fees, net 324, ,899 Endowment spending distribution 231,197 4, ,697 Investment income 7, ,930 Gifts 53, , ,719 Grants and contracts revenues Direct costs recovered 37 2, ,344 Facilities and administrative costs recovered 134, ,996 Patient services 821, ,849 Auxiliary enterprises - sales and services 88, ,7 19 Educational activities - sales and services 120, ,457 Affiliated hospital revenues 93,487 93,487 Other revenue 30,035 30,035 Net assets released 92,292 (92,292) - Total revenues and other support 2,37 0,986 22,146-2,393,132 Expenses Instruction 1,342,7 67 1,342,7 67 Research 47 1, ,609 Academic support 155, ,425 Student services 7 3, ,140 Institutional support 120, ,018 Auxiliary enterprises expenditures 100, ,413 Other deductions 24,438 24,438 Total expenses 2,287, ,287,810 Net operating results 83,176 22, ,322 Non-operating revenues and (expenses) Investment returns net of endowment spending 17 2, ,547 3, ,841 Changes and reclassifications of split-interest agreements 1,648 (1,008) (2,922) (2,282) Permanently restricted gifts 56,366 56,366 Other (7,214) (360) 1,940 (5,634) Non-operating, net 167, , , ,291 Change in net assets 250, ,325 58, ,613 Net assets Beginning of the year 3,542,734 2,329,002 1,431,134 7,302,870 End of the year $ 3,7 93,089 $ 2,577,327 $ 1,490,067 $ 7,860,483 The accompanying notes are an integral part of these consolidated financial statements. 4

7 Consolidated Statements of Cash Flows Years Ended (thousands of dollars) Cash flows from operating activities Change in net assets $ 917,912 $ 557,613 Adjustments to reconcile change in net assets to net cash provided by operating activities Realized and unrealized net gains on investments (960,358) (607,315) Depreciation expense 152, ,757 Permanently restricted gifts (83,696) (56,366) Investments received as gifts - not permanently restricted (4,980) (13,942) Proceeds from sales of investments received as gifts 4,980 13,942 Other noncash adjustments (4,135) (2,018) Changes in assets and liabilities Accounts and notes receivable, net (20,101) (30,7 82) Pledges receivable, net 17,47 0 (8,835) Accounts payable and accrued expenses 28, ,949 Deposits and advances (21,851) (16,867) Professional liability 1,856 10,232 Other assets and liabilities (11,368) (14,072) Net cash provided by operating activities 16, ,296 Cash flows from investing activities Proceeds from sales and maturities of investments 4,647,114 4,569,581 Purchases of investments (4,597,557) (4,574,440) Purchases of investments with securities lending collateral (11,7 44) (21,597 ) Purchases of fixed assets (237,660) (162,363) Student loans disbursed (23,205) (21,614) Student loan payments received 23,951 26,7 89 Other 468 (88) Net cash used in investing activities (198,634) (183,7 32) Cash flows from financing activities Principal payments of debt (7,490) (100,935) Proceeds from long-term debt issuance 14, ,7 85 Contributions restricted for long-term investment 58,502 56,967 Proceeds from sales of investments received as gifts 21,449 31,512 Securities lending collateral received 11, ,597 Other Net cash provided by financing activities 99, ,097 Net increase/(decrease) in cash (82,612) 50,661 Cash Beginning of year 198, ,316 End of y ear $ 116,365 $ 198,97 7 Supplem ental data Interest paid in cash $ 47,062 $ 47,7 25 Noncash investing activities Contributions of securities and other noncash assets $ 26,645 $ 46,926 Change in accounts payable for fixed assets 11, ,694 Change in accounts receivable for investments 27,7 90 (23,954) Change in accounts payable for investments 22,550 (6,025) Assets disposed net of offsetting liabilities - (6,951) The accompanying notes are an integral part of these consolidated financial statements. 5

8 1. Summary of Significant Accounting Policies Organization Washington University in St. Louis (the university ), is an institution of higher education that, in furtherance of its role as a charitable and educational institution, engages in various activities, including instruction, research and provision of medical care. Basis of Presentation and Use of Estimates The consolidated financial statements have been prepared on the accrual basis of accounting. The consolidated financial statements are consolidated to include the accounts of the university and its affiliates. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include, but are not limited to, the estimated useful lives of buildings and equipment, the fair value of certain investments (see footnote 2), the degree of precision in calculation of self-insurance reserves and adequacy of allowances for doubtful accounts. Actual results could differ from those estimates. Net Assets Resources are classified for accounting and reporting purposes according to externally (donor) imposed restrictions. Descriptions of the net asset categories follow: Unrestricted net assets are free of donor-imposed restrictions. Temporarily restricted net assets consist of gifts and related earnings that are subject to donor-imposed restrictions or legal stipulations that have not yet been met by actions of the university and/or passage of time. Permanently restricted net asset balances include gifts and trusts which, by donor restriction, are required to be held in perpetuity. Revenues from sources other than contributions and investment returns are reported as increases in unrestricted net assets. Contributions are reported as increases in the appropriate category of net assets, except that contributions which impose restrictions that are met in the same fiscal year they are received are included in unrestricted revenues. Gains and investment income that are limited to specific uses by donor-imposed restrictions are reported as increases in unrestricted net assets if the restrictions are met in the same reporting period as the gains and income are recognized, except for gains and investment income earned by investment of donor-restricted endowments. Such amounts are not reported as unrestricted net assets until appropriated for expenditure. When a donor restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the Consolidated Statements of Activities as net assets released from restrictions. Permanently restricted gifts received are reported in the non-operating section of the Consolidated Statements of Activities. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, the university reports 6

9 expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Expenses are reported as decreases in unrestricted net assets. Temporarily and permanently restricted net assets are for the following purposes Temporarily Permanently Temporarily Permanently Restricted Restricted Restricted Restricted General activities $ 2,118,715 $ 1,096,767 $ 1,833,991 $ 1,017,470 Student assistance 459, , , ,481 Buildings and renovations 394, , , ,825 Life income 15,510 22,665 12,060 22,290 $ 2,988,898 $ 1,580,910 $ 2,577,327 $ 1,490,066 Investment Investment gains/(losses) in excess of endowment spending distribution and the unrealized appreciation (depreciation) on investments are reported in the non-operating section of the Consolidated Statements of Activities. Investments acquired by gift or bequest are initially recorded at market or appraised value at the date so acquired. At, investments include $20,033 and $62,556, respectively, which were purchased with unexpended proceeds from the Series 2012A Missouri Health and Educational Facilities Authority (MOHEFA) revenue bonds issued in July These funds may only be expended for specific construction project costs and costs of issuance related to the MOHEFA bonds. 7

10 Fixed Assets Fixed assets are stated at cost or at fair market values if received as a gift, less accumulated depreciation, computed on a straight-line basis over the estimated useful lives of the assets. Fixed assets include equipment and other assets acquired through sponsored programs during which title is retained by the resource provider. It is probable the university will be permitted to keep the assets when the program terminates. The cost and accumulated depreciation of fixed assets are removed from the records at the time of disposal. Gains and losses on fixed asset disposals are reported in the non-operating section of the Consolidated Statements of Activities. Fixed assets by classification at consist of the following: Construction in progress $ 296,188 $ 158,432 Land and improvements to land 116, ,382 Buildings 3,016,608 2,947,446 Equipment 443, ,874 Total cost 3,873,039 3,634,134 Accumulated depreciation (1,863,814) (1,732,348) Total, net $ 2,009,225 $ 1,901,786 Collections In addition to the Mildred Lane Kemper Art Museum, the university archives rare book collections, works of art, literary works, historical treasures and artifacts. These collections are protected and preserved for public exhibition, education, research and the furtherance of public service. They are neither disposed of for financial gain nor encumbered in any manner. Accordingly, such collections are not recognized or capitalized for financial statement purposes. Financing Receivables Financing receivables are principally loans made to students or their parents utilizing gifts, endowment payout, and university resources designated for that purpose and from funds provided by the United States government under the Federal Perkins and Health Professional Student Loan programs. Loan funds are reported at estimated realizable value, as it is not practical to determine the fair value of loan fund receivables, which include a large component of federally sponsored student loans. Federally sponsored student loans have significant government restrictions as to marketability, interest rates, and repayment terms. Federal funds are ultimately refundable to the government and are recognized as a liability in the Consolidated Statements of Financial Position (see footnote 5). The university s loan portfolio includes over 12,300 individual loans and is geographically diverse. Loans that are made are due on the last business day of the month and are considered past due if the minimum payment is not received within forty-five days subsequent to the due date. At, respectively, 91% and 92% of the parent loans and 75% and 76%, of the institutional student loans were considered current. Income earned on financing receivables is recorded on an accrual basis. 8

11 Tuition and Financial Aid Undergraduate students receive financial aid based upon demonstrated financial need and academic promise. Graduate students often receive tuition support in connection with research assistant, teaching assistant and fellowship appointments. Total financial aid granted to students by the university, including aid provided to employees and their dependents, was $275,782 in 2014 and $262,593 in The table below identifies student aid by type. Scholarships are reported net against tuition in the Consolidated Statements of Activities. Other amounts are reported as expenses Scholarships from unrestricted sources $ 145,212 $ 135,654 Scholarship support from gifts, endowment and other restricted sources 44,723 41,560 Total scholarships 189, ,214 Employee and dependent tuition benefits 29,310 28,979 Stipends 54,002 53,878 Work study 2,535 2,522 Total $ 275,782 $ 262,593 Contributions Contributions, including unconditional promises to give, are recognized as revenues in the period the contribution or promise is received. Contributions received for permanent endowments or perpetual trusts are reported as non-operating revenues. Contributions of assets other than cash are recorded at their estimated fair value at the date of gift and, unless instructed otherwise by the donor, are liquidated upon receipt or as soon as practical thereafter. Gifts and conditional promises to give are not recognized until the conditions on which they depend are substantially met. Contributions, in the form of unconditional promises to give, to be received after one year are discounted at credit-adjusted tax exempt borrowing rates in accordance with fair value accounting. Pledges outstanding are discounted with rates ranging from 0.30% to 1.53%. Amortization of the discount is recorded as contribution revenue. An allowance is made for uncollectible unconditional promises to give based upon management s judgment, past collections experience and other relevant factors. 9

12 A summary of pledges receivable at June 30 is as follows: In one year or less $ 104,238 $ 114,916 Between one year and five years 97, ,958 Five or more years 24,835 22, , ,733 Less: Discount (3,277) (4,076) Allowance for uncollectible amounts (7,051) (8,134) $ 215,882 $ 228,523 Patient Services Revenue The university recognizes revenues in the period in which services are rendered. The university has agreements with third-party payers that provide for payment to the university at amounts that are generally less than its established rates. Accordingly, patient revenue is reported net of contractual allowances, at estimated net realizable amounts from patients, third-party payers and others for services rendered. Tuition and Fee Revenue Tuition and fee revenue, net of scholarships, is recorded in the fiscal year in which the educational programs are conducted. Auxiliary Enterprises Sales and Services Auxiliary enterprises sales and services revenue is recorded in the fiscal year in which earned. This revenue is composed primarily of on and off campus housing charges, dining services, and parking and transportation fees. Educational Activities Sales and Services Educational activities sales and services revenue is recorded in the fiscal year in which it is earned. This revenue is composed of a number of activities including clinical trial revenues, management services and salary reimbursements from affiliated hospitals, consulting, laboratory fees, conference center revenues and revenues from licensing and royalties. Affiliated Hospital Revenues Affiliated hospital revenue is recorded in the fiscal year in which earned. This revenue is composed of amounts received from affiliated hospitals for various services as more fully described in Note 11. Sponsored Programs The university receives grant and contract revenue from governmental and private sources. Revenue associated with the direct costs of sponsored programs is generally recognized as the related costs are incurred. The university records revenue in unrestricted net assets upon its recovery of direct and indirect costs applicable to those sponsored programs that provide for the full or partial reimbursement of such costs. The recovery of indirect costs, also referred to as facilities and administrative costs is based on negotiated rates and represent recoveries of facilities and administrative costs incurred under grants and contracts agreements. Recovery of facilities and administrative costs of Federally sponsored programs is at rates negotiated with the 10

13 university s cognizant agency, the Department of Health and Human Services. The university and the Federal government are currently operating under an agreement that establishes facilities and administrative cost reimbursement rates under Federal grants and contracts through June 30, Operating Results and Allocation of Certain Expenses The university s measure of operations as presented in the Consolidated Statements of Activities includes income from tuition and fees, grants and contracts, medical services, contributions for operating programs, the endowment spending distribution and other revenues. Operating expenses are reported on the Consolidated Statements of Activities by functional categories, after allocating costs for operation and maintenance of plant, interest on indebtedness and depreciation expense. Operating results exclude investment gains/(losses) except for the portion of gains utilized for the endowment spending distribution, permanently restricted gifts, change in the value of split-interest agreements, gains/(losses) on fixed asset disposals and interest rate swaps. Operation and maintenance of plant and depreciation are allocated to functional categories largely based on square footage. Interest expense is allocated based on specific identification of the uses of debt proceeds. Instruction expenses include instruction, departmental research and patient care costs. Split-Interest Agreements The university s split-interest agreements with donors consist primarily of charitable gift annuities and irrevocable charitable remainder trusts for which the university serves as trustee. Assets are invested and payments are made to donors and/or other beneficiaries in accordance with the respective agreements. Contribution revenues for charitable gift annuities and charitable remainder trusts are recognized after recording liabilities for the present value of the estimated future payments to be made to the respective donors and/or other beneficiaries. The discount rate used is a credit-adjusted rate in existence at the date of the gift. The rates used range from 1.14% to 4.07% for 2014 and.92% to 3.48% for Annually, the university records the change in value of split-interest agreements by recording at fair value the assets that are associated with each trust and recalculating the liability for the present value of the estimated future payments to be made to the donors and/or other beneficiaries. Conditional Asset Retirement Obligation The asset retirement obligation for the university relates primarily to the removal of asbestos from certain of its buildings. Known asbestos sites are appropriately encapsulated or controlled in accordance with current environmental regulations pending ultimate removal. As of June 30, 2014 and 2013, respectively, $16,443 and $17,311 of conditional asset retirement obligations are included within accounts payable and accrued expenses in the Consolidated Statements of Financial Position. Additional obligations recognized, obligations settled, and accretion expense were not material to results reported in the Consolidated Statements of Activities in any year. Cash and Cash Equivalents The university considers cash on hand and in banks and all highly liquid financial instruments with an original maturity of 90 days or less, except those amounts assigned to and invested by its investment managers, which amounts are classified as investments, to be cash and cash equivalents. 11

14 Income Taxes The university is exempt from federal income taxes under Section 501 (c)(3) of the Internal Revenue Code except to the extent the university has unrelated business income. There was no provision for income taxes due on unrelated business income in the current year. The university has no uncertain tax positions that result in material unrecognized tax expense/benefits. Recent Accounting Pronouncements During 2014 the Financial Accounting Standards Board (FASB) issued ASU , Revenue from Contracts with Customers. ASU , effective in fiscal 2018, affects all contracts entered into with customers that result in a transfer of goods or services or a transfer of nonfinancial assets by the university. The core principle of the standard is for organizations to recognize revenue in a way that depicts the transfer of goods or services to customers in amounts that reflect the consideration (payment) to which the organization expects to be entitled. The university is currently evaluating the impact the adoption of ASU will have on its consolidated financial statements. There were no other recent accounting pronouncements expected to have a material effect on the university s consolidated financial statements. 2. Fair Value The university follows FASB guidance for fair value measurements. This guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The FASB guidance establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the university and unobservable inputs reflect the university s assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the university for financial instruments measured at fair value on a recurring basis. The three levels of inputs are as follows: Level 1 Level 2 Quoted prices in active markets for identical assets or liabilities, such as exchange traded equity securities. Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities. Examples of Level 2 include U.S. Treasury securities and corporate bonds. 12

15 Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities including investments in certain hedge and all private market strategies. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following table presents the financial instruments carried at fair value as of June 30, 2014 by caption on the Consolidated Statements of Financial Position and by the valuation hierarchy defined above. Under applicable accounting guidance, certain alternative investments, such as hedged strategies, that do not have readily determinable fair values, but are redeemable in the near term at investee-reported net asset value per share or its equivalent, are reportable at Level 2. Also, included as Level 2 fixed income are U.S. Treasury securities of approximately $300,541. Quoted Significant Prices in Other Significant Active Observable Unobservable Balances Markets Inputs Inputs June 30, (Level 1) (Level 2) (Level 3) 2014 Investments Public equity Domestic $ 509,97 0 $ 928,053 $ 62,811 $ 1,500,834 International 1,236, , ,865 1,588,266 Fixed income Nominal - 807, ,701 Real - 102,107 2, ,191 Hedged strategies - 1,17 8, ,900 1,849,7 83 Private equity - - 1,110,449 1,110,449 Short -term investments 117,7 42 4, ,482 Deposits with bond trustees 20, ,033 Split-interest agreements 37, ,318 4,193 84,989 Beneficial interest trusts ,189 30,189 Real assets , ,788 Other investments - (2,531) 25,046 22,515 Total investments at fair value 1,921,885 3,301,010 2,606,325 7,829,220 Fixed income assets received from security borrowers - 31,096-31,096 Total financial instruments reported at fair value $ 1,921,885 $ 3,332,106 $ 2,606,325 $ 7,860,316 Other investments classified as Level 2 in the table above is principally the unfavorable fair value of the interest rate swap as discussed in Note 7. 13

16 The following table presents the financial instruments carried at fair value as of June 30, 2013, by caption on the Consolidated Statements of Financial Position by the valuation hierarchy defined above. Also, included as Level 2 fixed income are U.S. Treasury securities of approximately $655,150. Quoted Significant Prices in Other Significant Active Observable Unobservable Balances Markets Inputs Inputs June 30, (Level 1) (Level 2) (Level 3) 2013 Investments Public equity Domestic $ 27 9,615 $ 927,382 $ 45,190 $ 1,252,187 International 1,039,859 50,083 95,935 1,185,877 Fixed income Nominal , ,7 98 Real - 183, , ,661 Hedged strategies - 959, ,625 1,686,845 Private equity , ,653 Short-term investments 99,486 9, ,647 Deposits with bond trustees 62, ,556 Split-interest agreements 37,963 43,251 3, ,97 1 Beneficial interest trusts ,904 27,904 Real assets , ,433 Other investments - (5,444) 24, ,232 Total investments at fair value 1,519,47 9 2,837,850 2,509,435 6,866,7 64 Fixed income assets received from security borrowers - 19,351-19,351 Total financial instruments reported at fair value $ 1,519,479 $ 2,857,201 $ 2,509,435 $ 6,886,115 Other investments classified as Level 2 in the table above is principally the unfavorable fair value of the interest rate swap as discussed in Note 7. Included as investments on the Consolidated Statements of Financial Position, at June 30, 2014 and 2013, respectively, but not reported in the tables above, are accrued investment income of $4,368 and $6,343 and investments in affiliates of $40,175 and $36,302, which are recorded on the equity basis of accounting. A portion of Level 2 and 3 equity amounts reported above as of June 30, 2014 and 2013 are in hedge-type strategies and a portion of real assets are invested in private equity-type structures. Beneficial interests in perpetual trusts held by third parties are valued at the present value of the future distributions expected to be received over the term of the agreement. The university has recorded within investments the market value of assets held by third parties in perpetual trusts of $30,189 and $27,904 in 2014 and 2013, respectively. 14

17 Following is a description of the university s valuation methodologies for assets and liabilities measured at fair value. The methods described below may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the university believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Fair value for Level 1 is based upon quoted prices in active markets that the university has the ability to access for identical assets and liabilities. Market price data is generally obtained from exchange or dealer markets. The university does not adjust the quoted price for such assets and liabilities. Fair value for Level 2 is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Certain alternative investments, such as hedge funds, that do not have readily determinable fair values, but are redeemable in the near term at investee-reported net asset value per share or its equivalent, are also reported at this level. An alternative investment is considered redeemable in the near term if the university has the ability to redeem the investment or a portion thereof up to 180 days beyond the measurement date at net asset value. If the redemption extends beyond 180 days, the investment is categorized as Level 3. Inputs are obtained from various sources including market participants, dealers, and brokers. Fair value for Level 3 is based on valuation techniques that use significant inputs that are unobservable as they trade infrequently or not at all. Investments included in Level 3 primarily consist of the university s ownership in alternative investments (principally limited partnership interests in hedge, private equity strategies, real assets, and other similar funds). The fair values (Net Asset Value ( NAV ) or partner s capital per share) of the securities held by limited partnerships that do not have readily determinable fair values are determined by the respective general partners and are based on appraisals or other estimates that require varying degrees of judgment. If no public market exists for the investments, the fair value is determined by the general partners taking into consideration significant unobservable inputs including, among other things, the cost of the investments, prices of recent significant placements of investments of the same issuer, and subsequent developments concerning the companies to which the investments relate. Excluding the cost of the investment, significant increases or decreases in the remainder of those inputs could result in a significantly higher or lower fair value measurement. The university has performed due diligence with respect to these investments to ensure NAV or partner s capital per share is an appropriate measure of fair value as of June 30. NAV calculated by the investee in a manner consistent with generally accepted accounting principles for investment companies is reported as the fair value of the investment. 15

18 Valuation and other considerations concerning the major classes of investments are provided in the following paragraphs. Equity The equity class of investments is globally diversified across public markets including domestic and international developed and international emerging. The majority of equity assets are valued at quoted market price in accordance with Level 1 valuation techniques as described above. A moderate component is held in hedge-like strategies which are valued at NAV in accordance with techniques for Levels 2 and 3 valuations as described above. Fixed Income and Short-Term Investments Investments in this class include domestic and international nominal fixed income (nominal) and inflation indexed bonds (real). Fixed income investments are held principally as liquid vehicles for operating needs and as a source of diversification. A significant component of nonendowment fixed income investments is held in highly liquid funds. The valuation of these funds is determined using a market approach in accordance with the techniques for Level 2 as described above. Hedged Strategies Investments in hedged strategies are made in sub-strategies including event driven, distressed/credit, relative value, long/short equity, and global macro funds. The redemption frequency for these funds varies from monthly to every 2 years. Similarly, the required redemption notice period varies from 3 to 180 days. The total fair value of hedged strategies, including equity and fixed income investments with a hedge fund structure, held at was $2,733,790 and $2,445,363, respectively. Of this amount, $161,797 and $154,231 at June 30, 2014 and 2013, respectively, was in side pockets with indeterminate redemption periods. Another $187,593 and $209,797 were subject to initial investment lock-ups that at, respectively, will expire over the next 3 to 24 months. Some funds subject to lock-up permit early redemptions subject to a fee. At June 30, 2014, the university had commitments outstanding of approximately $30,800 for hedged strategy funds and $7,500 for equity investments with a hedge fund structure. Private Equity Investments in private equity strategies are made in targeted categories including buyout, venture capital, and corporate finance. Redemptions of such funds are not permitted and distributions are received as underlying investments are liquidated. The remaining lives of the agreements under which these investments are made vary from 1 to 12 years assuming all extension options under the agreements are exercised and approved. At June 30, 2014, the university had total private equity investment commitments outstanding of $722,002, but only a portion of this amount is expected to be funded in Real Assets Investments in the real assets class are made in targeted categories including natural resources and real estate. Such accounts represent approximately 8% of total investments. The majority of these assets are not held directly but are held in private-equity-type structures that invest primarily in real estate and natural resources. The valuation of these funds is determined using a market approach in accordance with the techniques for Level 3 as described above. 16

19 The following tables roll forward the Consolidated Statements of Financial Position amounts for financial instruments classified by the university within Level 3 of the fair value hierarchy defined above for the years ended. Balances Net Realized T ransfers Balances June 30, and Unrealized in (out) of June 30, 2013 Gains (Losses) Purchases Sales Level 3, Net 2014 Investments Public equity Domestic $ 45,1 90 $ 4,27 6 $ 15,090 $ (1,684) $ (61) $ 62,811 International 95,935 21,664 22,500 (27,234) - 112,865 Fixed income Nominal Real 73, ,001 (36,631) (50,012) 2,084 Hedged strategies 727,625 73, ,700 (84,446) (168,992) 670,900 Private equity 984, , ,322 (208,398) - 1,110,449 Short-term investments Deposits with bond trustees Split-interest agreements 3, ,193 Beneficial interest trusts 27,904 3,669 3,252 (3,7 26) (910) 30,189 Real assets 526,433 60, ,679 (130,846) 587,788 Other investments 24, (7 4) (37 ) 25,046 Total $ 2,509,435 $ 318,134 $ 491,807 $ (493,039) $ (220,012) $ 2,606,325 During 2014, transfers out of and into Level 3 from Level 2 of $274,847 and $55,745, respectively, and transfers out of and into Level 1 from Level 2 of $57,967 and $133,154, respectively were made as a result of changes in redemption periods. Also, a transfer out of Level 2 to Level 1 of $3,704 was made as a result of redetermination of level of certain short-term investments. Additional transfers out of Level 3 of $910 were made as a result of payments from beneficial interest trusts to beneficiaries. The university recognizes transfers as of the end of the reporting period. 17

20 Included in the change in net assets is the amount of net realized and unrealized gains/(losses) which includes net unrealized gains/(losses) for Level 3 investments for the period relating to assets still held at June 30, Net realized and unrealized gains/(losses) are reported as investment returns net of endowment spending in the Consolidated Statements of Activities. The amounts of net unrealized gains/(losses) for Level 3 investments held at June 30, 2014 by type are as follows: Public equity Domestic $ 4,631 International 18,201 Fixed income Nominal - Real 74 Hedged strategies 83,621 Private equity 67,488 Short-term investments - Deposits with bond trustees - Split-interest agreements 435 Beneficial interest trusts 2,483 Real assets 8,804 Other investments 191 Total $ 185,928 Net Realized and Transfers Balance Unrealized in/(out) Balance June 30, Gains of Level 3, June 30, 2012 (Losses) Purchases Sales Net 2013 Inv est m ent s Pu blic equ ity Domestic $ 7,000 $ 5,97 3 $ 35,149 $ (2,932) $ - $ 45,1 90 International 63,948 6,165 57,500 - (31,67 8) 95,935 Fixed incom e Nom inal Real 7 8,546 (5,284) ,262 Hedged strategies 616,688 70, ,000 (72,318) (165,256) 727,625 Private equity 933,553 95, ,263 (187,370) - 984,653 Short-term investments Deposits with bond trustees Split-interest agreements 3, (125) - 3,757 Beneficial interest trusts 26,351 2,183 4,858 (4,968) (520) 27,904 Real assets 487,240 34,267 91,101 (86,175) - 526,433 Other investments 24,829 3,301 1,800 (5,254) - 24,676 Total $ 2,241,426 $ 212,584 $ 6 1 2,02 1 $ (3 5 9,1 4 2 ) $ (1 9 7,4 5 4 ) $ 2,5 09,4 3 5 During 2013, transfers out of and into Level 3 from Level 2 of $223,550 and $26,616, respectively, and transfers out of Level 1 to Level 2 of $207,631 were made as a result of changes in redemption periods. Additional transfers out of Level 3 of $520 were made as a result of payments from 18

21 beneficial interest trusts to beneficiaries. The university recognizes transfers as of the end of the reporting period. Included in the change in net assets is the amount of net realized and unrealized gains/(losses) which includes net unrealized gains/(losses) for Level 3 investments for the period relating to assets still held at June 30, Net realized and unrealized gains/(losses) are reported as investment returns net of endowment spending in the Consolidated Statements of Activities. The amounts of net unrealized gains/(losses) for Level 3 investments held at June 30, 2013 by type are as follows: Public equity Domestic $ 5,929 International 4,025 Fixed income Nominal - Real (509) Hedged strategies 110,426 Private equity 11,040 Short-term investments - Deposits with bond trustees - Split-interest agreements 261 Beneficial interest trusts 1,553 Real assets 1,335 Other investments (182) Total $ 133,878 19

22 3. Investment Return The following summarizes the return on investments. Investment income represents earnings on nonendowed funds. Return on investments is presented net of investment management fees. Certain investments, including some but not all of those in the hedged and private equity categories, report investment returns net of fees. Other fees paid directly to investment managers and internal investment management costs were $40,968 and $34,943 for 2014 and 2013, respectively Investment income $ 9,056 $ 7,930 Pooled endowment dividends and interest income 33,299 32,223 Pooled endowment distribution in excess of income 214, ,474 Pooled endowment spending distribution 247, ,697 Investment gains, net 960, ,315 Gains distributed as endowment distribution (214,210) (203,474) Investment returns net of endowment spending distribution 746, ,841 Net investment gains $ 1,002,713 $ 647,468 At, investments with a fair value of $30,259 and $27,740, respectively, were loaned to various brokers on an open-ended basis for average periods varying from several days to several months, depending on the type of loan. The university receives lending fees and continues to earn interest and dividends on the loaned securities. These securities are returnable on demand and are collateralized by cash deposits amounting to 103% and 102% of the market value of the securities loaned at, respectively. The university is indemnified against borrower default by the financial institution that is acting as its lending agent. The borrowers provided $31,078 and $28,332 of cash collateral for the loaned securities at, respectively, and is reported in Deposits, advances and other on the Consolidated Statements of Financial Position. Most, if not all, of the cash is reinvested in other vehicles by the lending agent. Such collateral was invested in fixed income securities and had a fair value of $31,096 and $19,351 at, respectively, and is reported in Other assets on the Consolidated Statements of Financial Position. The Statement of Cash Flows for the year ended June 30, 2013 has been revised from previously reported amounts to correct the presentation of an investing activities cash use and a financing activities cash source of $21,597 related to activity under this securities lending program. Management believes this revision to the previously issued financial statements is immaterial. 4. Endowment The state of Missouri has adopted legislation that incorporates the provisions outlined in the Uniform Prudent Management of Institutional Funds Act (UPMIFA). The statutory guidelines contained in this legislation relate to the prudent management, investment, and expenditure of donor-restricted endowment funds held by charitable organizations. Additionally, the legislation 20

23 specifies factors for fiduciaries to consider prior to making a decision to appropriate from or accumulate into an institution s endowment funds. At June 30, 2014, the university s endowment consists of 3,101 individual donor-restricted endowment funds and Board of Trustees or management-designated endowment funds for a variety of purposes plus split interest agreements and other net assets where the assets have been designated for endowment. The net assets associated with endowment funds, including funds designated by the Board of Trustees or management to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. The university has interpreted Missouri UPMIFA as requiring the preservation of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the university classifies as permanently restricted net assets, (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted until the donor-imposed stipulations attached to those amounts have been met by actions of the university and or passage of time and appropriated for expenditure in a manner consistent with the standard of prudence prescribed by UPMIFA. Endowment net asset composition, which includes the effect of changes in endowment investments as well as other endowment-related assets and liabilities, by type of fund as of June 30, 2014: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (32) $ 2,727,657 $ 1,508,445 $ 4,236,070 Board-designated endowment funds 2,238, ,516-2,411,966 Total endowment funds $ 2,238,418 $ 2,901,173 $ 1,508,445 $ 6,648,036 Changes in endowment net assets for the year ended June 30, 2014: 21

24 Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets at beginning of year $ 1,867,014 $ 2,429,347 $ 1,421,348 $ 5,717,709 Investment return Net investment income 13,528 21,475 35,003 Net appreciation (realized and unrealized) 383, ,745 4, ,780 Total investment return 396, ,220 4, ,783 Gifts 1,334 1,724 80,142 83,200 Appropriation of endowment assets for expenditure (100,464) (147,045) - (247,509) Net transfers to create board designated funds 178,125 35,927 4, ,509 Allocation of endowment return to Treasurers Investment Pool (111,636) - - (111,636) Reclassification of deficits in donor-designated funds 1,888 (1,888) - Other activity 5,231 (3,112) (2,139) (20) Endowment net assets at end of year $ 2,238,418 $ 2,901,173 $ 1,508,445 $ 6,648,036 Of the amount classified as temporarily restricted endowment net assets, $2,324,013 represents the portion of endowment funds subject to time restrictions under Missouri s enacted version of UPMIFA. Endowment net asset composition by type of fund as of June 30, 2013: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (1,919) $ 2,304,891 $ 1,421,348 $ 3,724,320 Board-designated endowment funds 1,868, ,456-1,993,389 Total endowment funds $ 1,867,014 $ 2,429,347 $ 1,421,348 $ 5,717,709 22